Analysts bullish on auto stocks amid govt. measures on fuel, steel price

Analysts have turned bullish on auto stocks amid government’s measures to cut excise duty on petrol and diesel. That apart, tweaks in the import duty of raw material for steel manufacture, they believe, will aid demand recovery and lower the cost of vehicle ownership going ahead.

In the past two trading sessions, the BSE Auto index has moved up nearly 2 per cent given the development. In comparison, the S&P BSE Sensex has remained choppy with a negative bias.

Over the weekend, the government cut excise duty on petrol and diesel by Rs 8/litre and Rs 6/litre, respectively, besides reducing import duty on key raw materials like steel and plastic. On the other hand, it increased export duty on iron ore and other steel intermediates. 
 

All this, believe analysts at Nomura, may lead to over 10 per cent steel price reduction in the domestic market and will lower the cost of ownership of vehicles and positively benefit demand sentiment. That apart, lower commodity prices, Nomura said, should be positive for margins of most original equipment manufacturers (OEMs). For fiscal 2022-23 (FY23), they have pegged the industry volume growth at 50 per cent for Medium and Heavy CVs (MHCVs), 20 per cent for passenger vehicles (PVs) and 11 per cent for two-wheelers (2Ws).

“Our analysis indicates that the cost of ownership of car / 2Ws has gone up by around 17 per cent / 20 per cent over the past two years, led by rising fuel and vehicle prices. Thus, we have been concerned about mass consumption for entry-level cars and 2Ws since October 2022. The reduction in fuel prices can lead to around 2-3 per cent reduction in cost of ownership for cars / 2Ws and should be sentimentally positive for the demand outlook," wrote Kapil Singh and Siddhartha Bera of Nomura in a recent note.

At the operational level, Nomura sees margin benefit for companies in the backdrop of a cut in steel prices. A near 10 per cent drop in steel prices, according to their estimates, could see margin growth by around 200 basis points (bps) for CVs and tractors, around 100 bps for PVs and nearly 60 bps for 2Ws.

Those at ICICI Securities, too, remain optimistic on the fortunes of this sector post the recent developments and expect the companies to benefit from both demand as well as cost perspective.

“On demand perspective, decline in retail fuel prices will help spur automobile sales especially in the 2-W category wherein demand is more elastic to fuel prices. Decline in fuel prices also helps reduce costs of doing business, especially in terms of lower logistics costs,” analysts at ICICI Securities said in a note.

Among specific companies, analysts at CLSA expect Tata Motors' domestic business and Ashok Leyland to benefit the most from the decline in steel prices.

“We lift our earnings before interest, tax and depreciation allowance (Ebitda) estimates by 100 – 200 bps in FY23/24 for these companies, leading to a sharp increase in their earnings. Upgrade Tata Motors to outperform from underperform (target price: Rs 480), and Ashok Leyland to 'buy' from outperform (target price: Rs 178),” analysts at CLSA wrote in a recent note. In the 2W pack, they remain bullish on Eicher Motors and Bajaj Auto.

Those at Nomura, on the other hand, prefer Tata Motors, Ashok Leyland and Mahindra & Mahindra. In case of suppliers, they prefer Sona BLW Precision Forgings, Sansera and Bharat Forge.